“Markets are signaling that both the US and China have blundered into a minefield,” Nicholas Colas, co-founder of DataTrek Research, wrote in a note to clients.
How low do stocks need to go?
However, the Fed may be reluctant to act unless the situation badly deteriorates.
A decline to that level would amount to a full-blown bear market, marking a 22% decline from the S&P 500’s all-time high. It would also be 19% below Tuesday’s close.
In other words, the Fed shouldn’t be counted on for help until investors have priced in a recession.
“I don’t think the Fed will react unless we are seeing a very big slowdown,” said Mustafa Sagun, chief investment officer at Principal Global Equities, which manages more than $350 billion. “I see a low probability for a rate cut this year.”
Zero percent change of a rate hike
The futures market, however, says otherwise.
Investors see just a 30% chance that the Fed holds the line and keeps interest rates steady in 2019, according to CME. And there’s a zero percent chance that the Fed even raises rates just once.
Boston Fed President Eric Rosengren, a voter on Fed policy, said he’s “not necessarily” expecting a rate cut. However, he left the door open for one.
Esther George, an inflation hawk and president of the Kansas City Fed, acknowledged on Tuesday that the tariff battle is a threat to the otherwise solid US economy. But George downplayed recent concerns about decelerating inflation.
Meanwhile, investors, bracing for more potential trouble in financial markets, are hedging their bets.
A record-high 34% of investors polled by Bank of America said they have taken out protection against a sharp fall in stocks over the next three months.